Does P&G or doesn't P&G overpay for Clairol?

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Now that Procter & Gamble Co. has proposed a $4.95 billion acquisition of Bristol-Myers Squibb Co.'s Clairol, P&G's priciest deal ever leaves questions about how the company will turn around Clairol's graying hair color business.

P&G's pursuit of Clairol, first reported in Advertising Age Nov. 20, ended in a shootout with Japan's Kao Corp. in which P&G paid close to the top of the anticipated $4 billion to $5 billion price range. Some familiar with the situation believe P&G paid a $450 million premium over Kao, based on anticipation of a lengthier regulatory review than Kao would have faced. After tax benefits, P&G's outlay is about $4 billion.

Jim Gingrich, analyst at Alliance Capital Corp.'s Sanford C. Bernstein & Co., said P&G paid "a rich price" for Clairol, a brand he described as declining and somewhat declasse. His report was part of a widespread analyst mantra that Clairol was a good strategic fit for P&G, but he hastened to add that the Clairol hair coloring business is a fixer upper.

Not only has Clairol's U.S. market share declined more than 10 points to 37.1% in the past five years, but its consumer base also tends to be lower-income and less educated than that of rival L'Oreal, he said. Herbal Essences, while more than tripling its market share to 10.1.% from 1994 to 1999, slipped to 9.3% last year, he added.

Merrill Lynch analyst Heather Hay Murren called the deal's numbers "quite palatable for a large transaction," and in line both with expectations for Clairol and other recent household and personal care products deals. P&G's stock fell about 5% to $64 on May 22, the day after the deal was announced, although package-goods stocks frequently fall on acquisition news, given the track record in recent years of most deals failing to justify the premiums acquirers pay.

In a conference call with analysts, P&G President-CEO A.G. Lafley blamed some of Clairol's decline on dwindling marketing support the past two years. Chief Financial Officer Clayton Daley indicated P&G has budgeted $50 million annually in increased marketing and new product development.

It's not certain, however, whether Clairol's advertising or agency will shift under P&G leadership. Its traditionally staid image aside, P&G likes Herbal Essences' innuendo-laden "organic experience" campaign, along with the rest of Clairol's brand heritage, said Bruce Byrnes, P&G's president-global health and beauty care.

"If you look at these brands just as brands, starting with colorants and moving to Herbal Essences, these are absolute classics of brand equity in advertising," he said. "This is the business that had `Does She or Doesn't She?' This is the business that had `Blondes Have More Fun,' `The Closer He Gets the Better You Look,' and `The Totally Organic Experience."'

Linda Kaplan Thaler, who created the Organic Experience campaign, left the now-defunct former P&G roster shop Wells Rich Greene in the mid-1990s to start her own shop because of the conflict between Herbal Essences and P&G's then-developmental Physique brand, then handled by Wells. Today, Kaplan Thaler Group is part of Bcom3 Group, also home to P&G roster shops D'Arcy Masius Benton & Bowles and Leo Burnett Co. Interpublic Group of Cos.' FCB Worldwide, New York, handles Clairol hair coloring advertising.

In the end, P&G did not swap drug brands as part of the Clairol deal, as Ad Age reported the company was prepared to do. Mr. Lafley would not comment on when or whether P&G had discussed such a swap. He did, however, offer a qualified vote of confidence in the drug business, which some analysts still believe may be sold. "Right now, we are feeling that we're a pretty decent niche player in [pharmaceuticals] and, as I said before, the bigger issue is going to be five years, 10 years from now, where are we going to be, and we're of course thinking about that."

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